New U.K. Mortgage Rules Are Good for Banks and Home-Buyers

Pedestrians pass an estate agent’s sign advertising a property as sold in Saffron Walden, England.

The Financial Services Authority Thursday announced new mortgage rules that will be put into practice by 2014.

The regulations are designed to help both lenders and borrowers after both groups suffered in the global credit crunch which began five years ago.

Yes, the new rules state that lenders must verify potential borrowers’ incomes with employers, rather than just believe what is written on a form. And yes, a strict affordability criteria must be followed by all lenders to make sure people who want to buy a house can afford the monthly repayments even if interest rates go up, which they will.

And, while it is true that this could make it more difficult for some potential home-buyers to get a mortgage, it is also true that it will help to safeguard against huge numbers of people taking on a mortgage that they really cannot afford.

“Lenders became too exuberant at the height of the crisis,” said Martin Wheatley, managing director of the FSA and CEO-designate of the Financial Conduct Authority, speaking on BBC radio Thursday. “What we’re doing today is announcing a package which puts common sense back into mortgage lending.”

Other U.K. bodies agree.

“These new mortgage rules will apply from April 2014 and no one can argue with the objective that lenders lend what consumers can afford to repay,” said Paul Broadhead, head of mortgage policy at the Building Societies Association said.

“It is common sense that a mortgage should be repayable from income, rather than rely on increasing property prices and this is the approach that building societies and other mutual lenders already take. Checking that a mortgage can still be repaid if mortgage rates rise also makes sense and lenders will have to take a five year view on this.”

The Council of Mortgage Lender’s director general, Paul Smee, made similar comments to the BSA in a press release, adding that “in practical terms, the regulatory changes have already been widely anticipated and so are unlikely to create any significant additional or unexpected impacts.”

And, not only do the new rules attempt to protect, borrowers, lenders, and also the economy from poor mortgage lending practices, they are also introducing a new rule immediately which aims to help home-owners to re-mortgage or buy a new home without falling foul of prohibitively high interest rates.

“Lenders can ‘switch off’ the affordability and interest-only requirements for existing borrowers who want to get a new mortgage for the same amount or less, providing they have a good repayment history,” the FSA said in a press release. “While any lending decision is a commercial one, lenders will also be able to use these arrangements to take on the customers of other lenders. Lenders will, with immediate effect, be prevented from treating these customers less favorably than other customers.”

This is one of a number of rules that has been revised from the original proposals set out in December last year. A change which was likely encouraged in order to help banks increase their lending.

The FSA began the Mortgage Market Review in 2009.

And, the more pressing problem of interest only mortgages-where a home purchaser only repays the interest each month rather than the interest and part of the principle sum — has also been addressed.

No longer will home buyers be permitted to rely on an assumed rise in house prices to repay the initial mortgage loan at the end of the agreed term. A plausible plan, be it savings, pension payout or investment must be agreed before interest only mortgages will be approved.

So, the new regulations, many of which are already being strictly implemented by U.K. high street lenders who were burned pretty badly just a handful of years ago, look pretty sensible to me.

It’s possible that some potential home-buyers who are still priced out of a housing market where prices haven’t dropped all that much from the pre-credit crunch peaks might view them with disdain.

The average U.K. house price was £163,964 in September this year compared with a peak of £186,044 in October 2007, according to U.K. lender Nationwide.

But, they may in the long run prefer to be annoyed at being turned down for a mortgage now, than be homeless and bankrupt if another crisis were to hit.

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